Cabinetmaker Paul Downs is the author of Boss Life, Surviving My Own Small Business, a book-length essay that goes on sale August 4th, published by Penguin Random House. The book details his creation of a small furniture business in 1986 and the ups and downs he has experienced on his way to creating a dynamic and successful business. His story is unique, from his business to his blog, "You're the Boss" for the New York Times to his rise as a media star in the woodworking business. We were able to obtain this excerpt from his book:
Date: Monday, January 2, 2012
Starting bank balance: $137, 154.32
Cash relative to start of year ("Net Cash"): $0
New-contract value, year-to-date: $0
9 a.m., January 2. Paul Downs Cabinetmakers, custom boardroom table maker, starts its twenty-sixth year with a meeting. We are on the fourth floor of an old factory in Bridgeport, Pennsylvania. I stand at a battered table, returned to us for storage when our client, a New York bank, downsized in 2008. Thirteen sleepy workers, sitting, wait for me to speak.
We meet every week at this time. The usual agenda is a review of our progress toward meeting monthly and yearly sales goals, a review of projects in progress, and a report on our cash reserves. I’ll get to all that, but start with a surprise: good news—2011 has ended on a high note. We have a record amount of cash on hand, and a full order book to take us through the next two months. I confidently state that we have achieved success at last. The business has finally done more than build tables. It has also made good money.
Two years ago, as 2010 began, I was not so confident. A decade of my incompetent stewardship, capped by two brutal years of recession, had left the company at death’s door. We had shrunk from twenty-three employees to six, and I had just $16,239 in the bank— enough to operate for three days. A small business lives or dies on cash. It is the fuel that pays the rent, buys the materials, funds the ads, and makes the payroll. If I ran out, the shop, the tools, the Web site, the trained employees, the catalogue of designs: all would sit idle. The business would be dead.
I desperately needed clients with cash in hand. This is the perennial cry of the incompetent boss— if we just had more sales, every-thing would be great! But for me it was true. Before 2008, I had been very bad at cash management. Then, as the world slid into recession, buyers disappeared. My partner and I fought about the money we had left, and one night he took our cash reserves and paid down our line of credit. Eighty-eight thousand dollars of the $105,000 I had on hand was gone. I immediately laid off half of my people. With a shrinking order book, demoralized workforce, and a hundred thousand dollars in past due bills, I had one question: how soon would I have to shut the doors? QuickBooks couldn’t tell me, so I wrote a spreadsheet that gave me a running bank balance, taking into account all income and expenses, for as far forward as I cared to look. I could move transactions from one day to another to see how delaying or accelerating payments affected my bank balance. As long as it never went below zero, I was in business. My sheet was a new way to see my cash situation. Unfortunately, it showed that I’d go broke in three weeks.
I barely survived the terrible year 2009. Customers purchase our product, custom conference tables, when a business moves or ex- pands. As 2008 ended, we still got a few orders from projects initiated before the crash, but sales volume soon took a huge drop. I took any job I could find, but I had to lay off five of my eleven remaining
employees. I cut all my workers’ pay by 15 percent and set my own salary at just $36,000 a year. I rarely had more than a week’s worth of cash on hand. The stress of wondering whether I would have to close the doors was relentless. I experienced shooting chest pains and sleepless nights. But I never quite failed. By juggling incoming and outgoing payments, I managed to pay off my vendors and sur- vive to see another year. The year 2010 started with no relief—in January, I came within a day of running out of money. But in Febru- ary, buyers started calling. By March 2010, with orders appearing at a sustainable rate, I was able to restore everyone’s pay to previous levels and rehire some laid-off workers. By year’s end, I had ten em- ployees and a bank balance of $106,777.
The favorable trend continued in 2011. I added more people and completed more jobs. At the end of the year, we got a large order that generated a huge payment. Our bank balance topped out at
$303,834, and I was able to distribute big bonuses to my workers and to myself, totaling $166,680. I was a happy man. I had survived the worst of the recession and learned how to manage cash flow. In three years, I had gone from nearly bankrupt to reasonably secure, paid off a pile of vendor debt, and was looking forward to further growth in 2012.
Does compressing three years of disaster and regeneration into dollars communicate what it was like? Do those numbers really de- pict my own stress, my workers’ fear for their jobs, and my debtors’ doubts that I would pay them back? Definitely not. But those bal- ances are an objective measure of the success or failure of a business. In the end it has to be about the money. Numbers don’t lie.
Back to my meeting. On this day I have $137,154 on hand, but my other numbers get reset. Inquiries, sales, profits: all zero. Every year I start from scratch, worrying that this time the phone won’t ring,
orders will stop, and my cash will dry up. I don’t believe that the things we do to generate sales will suddenly stop working, but I’ve been through bad times and it’s hard to have faith in the future.
t h e nu m b e r s t hat track our expenses also start at zero, but increase with every passing minute. Rent, electricity, and equip- ment leases never stop. Payroll and material costs start the instant someone shows up to work. It all adds up. Operating the shop, in- cluding pay for fifteen workers and a decent salary for myself, costs about $9,000 a day.
We generate cash to cover those costs in two ways: write new orders, or ship product. Our usual terms are to get half of the money on order placement, 35 percent before we ship, and 15 percent within ten days of delivery. If we sell and produce at a steady pace, we receive many payments each week. Our goal is to take in more than we spend, but every table we make generates significant costs. So even when things go smoothly on the shop floor, most of our cash is paid out to cover the rent, materials, payroll, and other ex- penses. Our plan is to have a little bit left over and to steadily ac- cumulate that surplus over the course of the year. This is known as “positive cash flow.”
You might assume that that is the same thing as profits. Not so. You can have positive cash flow without profits, and profits without positive cash flow. How? Profit, for a manufacturer, is a technical term that describes a particular situation: when the value of product shipped exceeds the costs incurred during a given time period. “Sales” does not mean what you think it does, either. Again, the ac- counting definition, as it applies to a factory like mine, is that a sale occurs when finished product is delivered to the client. That thing where the client signed our quote and gave us a big deposit? Not a
sale. As far as our accountant is concerned, the client just loaned us some cash, which we can repay by delivering a finished table. When it arrives, the deposit and preship payments become ours to keep, the value of the table is added to our income statement as a sale, and any amounts outstanding are added to our list of assets, even though we don’t have them in hand and can’t use them to cover expenses.
You can have profits without positive cash flow: we might make and ship tables and pay for the costs of production, but not get paid by the client. If our costs are lower than the value of delivered prod- uct for a given period, we are making a profit, even though we don’t have the money in hand. Without cash on hand to buy materials and pay the workers, operations will eventually stop. Moral of story: get paid. Profits don’t mean much otherwise.
And positive cash flow without profit? If we ink a bunch of deals, we might suddenly get a lot of deposit payments. During that same time, our factory may not be operating efficiently, and the costs of making goods might exceed the value of the products we deliver. We have cash, but we aren’t making profits. This can easily happen if a company has effective marketing but poorly managed production. This is how I operated for many years. We were grow- ing a little faster than we were failing. Money from new clients com- pensated for the losses incurred as we produced furniture for the old clients. Everyone got the product they ordered, but hiccups in sales resulted in cash shortfalls, and I had to dip into my own pocket to cover expenses.
There’s a third way to bring in cash: borrow it. Income, raised by whatever means, counts in cash-flow calculations. The problem with borrowed money is that eventually it needs to be paid back. Or not, if you can find a fool to lend to you. In my own company, that fool would be me. When I covered cash shortfalls from my own sav- ings, as I often did, I was loaning money to the company. I always
intended to pay myself back right away, but the bad management that got me into trouble in the first place prevented me from making sufficient profits for a payback. Over the course of twenty-six years, I have loaned Paul Downs Cabinetmakers $508,774 and managed to pay back $121,676. I am still owed $387,089. Am I a rich man who has half a million lying around to keep my company going? No. The money came out of the company to me as salary and went back in as loans, over and over. Not very smart, as every dollar that took this trip was subject to payroll taxes as it went out of the company.
i ai m t o have positive cash flow at all times. Unfortunately, it doesn’t happen that way. We have a regular rhythm to our expenses: rent at the beginning of the month, payroll every other Tuesday, two credit card due dates, and the ongoing purchases of materials and other items. Income is much more erratic. Some days we get lots of cash, some days we get nothing. This is why I want to have a healthy bank balance: to cover the days or weeks when cash flow is negative. The $137,154 that I start the year with is fifteen days of working capital. I can use it to pay bills and make payroll. If I want to, I can spend some of it on projects that might enhance the busi- ness, like more advertising or a new machine. But if we spend $9,000 a day, a conservative estimate, I have three weeks to figure out what to do if the money stops coming in.
I already know what to do: sign new contracts, ship finished product. The magic number for 2012 is $200,000. That’s my monthly target for both incoming orders and outgoing shipments. This will produce a steady cash flow of $200,000 a month. If expenses are at
$9,000 per day, and the work year consists of 250 workdays, we will have positive cash flow of $150,000 over the course of the year.
Sell $200,000, ship $200,000. We will have to build a lot of ta-
bles. Not a trivial task—far beyond the capabilities of any one per- son. In small woodshops, a ratio of employees to sales of $120,000 per worker is good, $150,000 per worker is excellent. I have fourteen people to meet a goal of $2,400,000, which means output of $170,000 per worker in the next year. We will need to be very efficient.
what wi l l we do to meet that goal? You might picture everyone at a workbench, cutting wood. But building the tables is only one step in our process. A manufacturing business must perform six major functions to stay alive: Design, Marketing, Production, Logis- tics, Warranty Service, and Administration. Design operates at both the conceptual level, which in my case is the decision to make furni- ture, and at the individual level, which is the specific design of each table we make. Marketing attracts paying customers to your door by describing to the world the goods that you have available. It includes sales. Production is the actual making of the product, including setup of the factory, acquisition of materials, hiring and manage- ment of labor, and design of the work processes that lead to finished goods. Logistics is the process of moving your finished goods to the customer: packaging, shipping, and installation. Warranty Service, which might be considered a form of Marketing or Production, is in my mind a separate function. It consists of responding to customer issues and communicating them back up the function chain to im- prove the overall performance of the organization. Administration keeps track of all the other functions, and includes bookkeeping, accounting, dealing with government regulations, and human re- source duties.
Note that the six functions are all connected, not just in a linear progression, but also through feedback loops from one function to each of the others. For instance, Design must respond to the expec-
tations of potential customers (Marketing), to the capabilities of the factory (Production), to the problem of shipping and delivery (Lo- gistics), and to issues encountered in the real world (Warranty). Changing the nature and capacity of one function has implications for the entire operation.
It is entirely possible to break out any of these functions and have them performed by others. This is called “outsourcing,” and it often makes perfect sense. If you are not competent at one of the functions, hire someone who is. Managing that vendor takes money and time and drastically interferes with effective feedback loops. But it allows access to expertise that can be very difficult to develop in-house. Note, also, that in an extremely small company, one per- son can perform all these functions, and probably will when the company is starting up. In that case, the feedback loops are instant, and so continual that their existence might not even be noticed. This can be good or bad, depending on whether the feedback loops lead to changes in behavior.
It is worth mentioning the difference between a hobby and a real business. It is commonly believed that it’s easy to step from one to the other, but that underestimates the difficulty of establishing all six functions. A hobbyist only needs to perform two: Design and Production. Marketing is not required, as the client is the hobbyist. Logistics might be an issue, but usually a trivial one, as the item is produced very close to where it will be used. Warranty issues are easily handled—there is no paying customer, and the hobbyist’s re- sponse will depend on how he feels at the moment. Administration is insignificant. Being a hobbyist is much, much simpler than being a business. There are far fewer problems to solve, and almost all the time and effort can be spent on the fun stuff.
My constant challenge has been to perform all six functions com- petently using the limited resources of a small company. In 1986, I
had a desire to make furniture, but no experience. Of necessity, I first mastered Design and Production, working alone as I taught my- self my trade. Eventually I learned to perform all six functions, some just well enough to stay in business. Production has been the pipeline through which new people enter the company. I hire people to work at the bench, and move some into other jobs.
At the beginning of 2012, we have thirteen full-time employees, a part-time bookkeeper, and one temporary worker. Six of us work in the office: myself; Emma Watson, the admin; Dan Smolen and Nick Rothman, who, along with me, are the sales force; Andy Stahl, the engineer; and Pam Potter, the bookkeeper. Six work on the shop floor building tables: Steve Maturin, shop foreman, accompanied by Ron Dedrick; Sean Slovinski, Tyler Powell, Will Krieger, and Edu- ardo Lopez, cabinetmakers; Dave Violi, who does the finishing; Bob Foote, our shipping manager; and Jésus Moreno, the temporary worker.
With the exception of Emma and Jésus, all my workers are crafts- men who have worked in shops for years. Woodworkers have a calm and quietly confident demeanor, grounded in their ability to build things well and quickly. The best ones have what I call “good hands”: they can make things without undue fuss, at high speed, without sacrificing quality. They can visualize how to break a complex project into discrete steps, recover when things go wrong, and always keep moving toward the final goal. In my experience, this talent is very rare. At the same time, it is present in every culture. In any group of humans, some have a special ability to manipulate materi- als to produce useful things. A few craftsmen have done spectacular work that ends up in museums. But most make ordinary items that serve their purpose and then are discarded. That is the kind of work we produce, the kind of workers we are: not in it for fame and for- tune. The opportunity to make good things is a satisfaction in itself.
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